When evaluating two unique projects that cannot both be chosen, one project shows a higher Internal Rate of Return (IRR) but a lower Net Present Value (NPV) than the other. Which project should a business pick to make the most money, and why?

When evaluating two unique projects that cannot both be chosen, the business should pick the project with the higher Net Present Value (NPV) to make the most money. The primary objective of a business is to maximize shareholder wealth, and NPV directly measures the absolute dollar amount that a project is expected to add to the value of the business. Net Present Value calculates the present value of all expected future cash inflows and subtracts the present value of all expected future cash outflows, using the company's cost of capital as the discount rate. A higher positive NPV indicates a greater increase in the wealth of the company's owners in absolute dollar terms. Internal Rate of Return (IRR), on the other hand, represents the discount rate at which a project's Net Present Value equals zero. It is a percentage measure of a project's expected rate of return. While IRR is a useful metric for evaluating a project's efficiency, it can lead to incorrect decisions when comparing mutually exclusive projects, especially when projects differ significantly in their initial investment size or the timing of their cash flows. In such cases, a project with a higher IRR might be a smaller project or one that returns cash more quickly, but it may not necessarily generate the largest total dollar increase in value for the company. Because the goal is to maximize the absolute wealth of the business, the project that adds the greatest dollar amount of value, as indicated by a higher Net Present Value, is the correct choice, even if another project shows a higher percentage return via its Internal Rate of Return.